Living Wage Implications For Smaller Family Firms

6th October 2015 Paul Andrews

Small firms expect to slow hiring and increase prices in response to National Living Wage, say FSB

Following the announcement of a new National Living Wage for the over 25s, a survey of employers has found significant numbers of small firms concerned about the impact the new wage rate will have on their businesses. Many are planning to slow job creation, raise prices or postpone or cancel planned investments to compensate for the higher statutory rate.

The Federation of Small Businesses (FSB) research found well over a third (38%) of small employers expect the new National Living Wage of £7.20 an hour to negatively impact their business when it comes into force in April 2016. When asked to consider the projected rise in the National Living Wage to at least £9 an hour by 2020, over half (54%) said it will have a negative impact. Just six percent of businesses thought the policy would have a positive impact on their business when it is implemented next April.

Businesses in the wholesale and retail sector, and those working in accommodation and food services, are most likely to say the National Living Wage will have a negative impact. In addition, businesses in Yorkshire, the West Midlands, Wales and the South West are among the most likely to cite a negative impact.

Today the FSB has also published its latest Cost of Employment Index. The Cost of Employment Index is a comprehensive model of wage and non-wage costs for small businesses across a range of sectors. The model estimates that for a small retail business with six full time staff aged 25 or over and earning the current adult minimum wage, the National Living Wage will cost an extra £5,900 a year from April 2016.

Annual labour costs for this business stand at approximately £127,700. Even after claiming the higher Employment Allowance (which is set to rise to £3,000 next year), these costs are set to rise to £133,600 in April 2016 due to the National Living Wage. In other words, the £3,000 of potential savings to employers from lower national insurance contributions will reduce the £8,900 higher wage costs incurred in this case, but will still require this employer to find nearly £6,000 to cover the additional costs. This takes place just six months after employers have already increased wages due to the increase in the minimum wage on 1st October 2015.

The FSB is cautioning policy makers that although small business confidence and hiring intentions have been strong in the past few years, recent FSB research shows a marked cooling in confidence since the Summer Budget. It is likely that the measures announced, including the National Living Wage as well as changes to the tax treatment of dividends, has contributed to this dip in confidence. Concerns over statutory wage increases also come at a time when small business owners, many on modest incomes, are facing up to the additional costs to their business of pensions auto-enrolment – which will add further pressures to stretched budgets.

John Allan, FSB National Chairman, says: “The UK economy has been performing well, but we should not allow this to make us complacent. Businesses worked hard to weather the financial crisis, keeping on staff despite pressure to cut headcounts. Now times are better we know members are beginning to raise wages and take on new staff."

“Over half of our members already pay their staff above the voluntary Living Wage, but those that don’t are often operating in highly competitive sectors with very tight margins. In many of these industries, the only sustainable way to deliver real long term wage growth is to improve productivity. Without improved productivity there is a real risk that higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, to job losses.”

When businesses that said they will be negatively impacted were asked how they will adapt to the new National Living Wage when it comes in, just over half (52%) said they would put off hiring new staff while 50 per cent said they will raise their prices.

Other steps businesses plan to take to manage the higher wage level include: cutting staff hours (41%), reducing staff numbers (31%), cancelling or postponing planned investments (29%) and eroding pay differentials by freezing or cutting the wages of higher paid staff (26%). Almost a third of businesses owners expected to absorb the cost through reduced profits (29%).

John Allan concluded: “With the economy recovering it is right that employees should be rewarded with a pay rise – but we cannot allow wages to become a political football."

“It’s important that the independent Low Pay Commission continues to play a central role in setting the minimum wage – and that includes deviating from the Government’s plan to raise the National Living Wage to over £9 an hour by 2020, if it becomes apparent that the economy cannot afford it.”